Payfare Inc

TSX:PAY

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to Payfare's 2022 Q2 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded.

I will now turn the conference over to Mr. Cihan Tuncay, Head of Investor Relations and Corporate Development. Please go ahead.

[Cihan Tuncay, executive]

Thank you, operator, and good morning, everyone. Joining me on the call this morning is Marco Margiotta, Payfare's CEO and Founding Partner; and Charles Park, Payfare's CFO.

Payfare would like to note that our company's remarks and answers to your questions today may contain forward-looking statements that are based upon management's current expectations. All such statements are made pursuant to the safe harbor provisions of and are intended to be forward-looking statements under applicable Canadian securities legislation. When relying on forward-looking statements to make decisions with respect to the company, you should carefully consider the risks set forth in the Risk Factors section in the annual MD&A for the year ended December 31, 2021, which is available on www.sedar.com. Except as may be required by Canadian securities laws, the company does not undertake any obligation to update any forward-looking statements as a result of new information.

We would also like to remind listeners that Payfare uses certain non-GAAP and supplementary financial measures to arrive at adjusted results to assess its business and to measure overall performance. Payfare believes that these financial measures provide readers with a better understanding of how management views the company's overall performance.

Throughout the call, we will also refer to a slide deck, which is posted on our website, corp.payfare.com/investors last night. I will now turn the call over to Marco Margiotta.

[Marco Margiotta, executive]

Excellent. Thanks, Cihan, and good morning, everyone. Thanks for joining.

Let's get started on Page -- or Slide 3. The second quarter was a record for Payfare on all our operating and financial metrics. The most significant milestone we achieved was crossing the threshold of positive adjusted -- sorry, EBITDA generation for the first time this quarter, several quarters earlier than we expected. We also crossed the threshold of positive operating cash flow this quarter for noncash working capital adjustments, which were largely timing related.

We are proud to demonstrate that our core business is both profitable and self-financing. Importantly, our team achieved this without pulling back on our growth or headcount reductions. Payfare remains in growth mode, and we have a clear line of sight ahead of us to say that we expect to be both adjusted EBITDA and operating cash flow positive this year. We're an asset-light business with little to no foreseeable CapEx requirements, so our operating cash flow profile is also a good proxy for free cash flow.

We achieved these milestones because of our strong partnerships and integration with our key gig platform partners and clients. Our ultra-low-cost distribution model, realizing significant processor cost improvements with approximately $2 billion of GDV going through our rails per quarter, and our focus on delivering a high-quality user experience combined with a compelling suite of rewards for our cardholders and capture additional wallet share. I would like to take this opportunity to thank and congratulate our amazing staff on achieving these key milestones.

The second quarter was also the first time we were active on our previously announced Normal Course Issuer Bid program. To date, we have repurchased approximately 258,000 shares at an average price of $4.53 per share, which represents a discount of 10% to our closing share price last week. We continue to believe our share price is significantly undervalued, and we will remain opportunistic on future share repurchases. We're extremely well capitalized, and the buyback program has no impact on our ability to deploy capital strategically.

We also announced an increase to annual revenue guidance to $125 million to $135 million, from $115 million to $125 million previously. This is a function of higher than previously expected points of sale volumes and GDP growth. We have seen little to no negative impact so far on our business from inflation or other macroeconomic headwinds. Our view is consistent with what our key gig platform disposed in the new round of earnings release last week, Price increases are driving higher gig workforce acquisitions across the industry as work as response to inflation by supplementing their income with gig work, which is a net benefit for our user and GDV growth.

On the consumer side, there has been no disparable slowdown in delivery or rideshare activity. Our partners that have launched cash-back rewards on fuel purchases to our cards have disclosed that their worker acquisition costs are at an all-time low, and have continued to trend lower for successive quarters after partnering with Payfare to financially empower their workers with free instant payouts, a free new bank account and robust loyalty rewards. This demonstrates the value that Payfare delivers for its clients, and why the largest platforms have chosen to partner with us. We look forward to providing these same benefits to new clients we have in our pipeline.

Let's turn to Slide 4. We are proud to have launched the Paid App by Payfare at the end of the second quarter with an initial cohort of new clients for our U.S.-based audience. You will be able to see our app and running -- up and running on the iOS and Android app stores. Congratulations again to our team for delivering Paid App, which is a culmination of the year of working on the project. Paid App now has a dedicated sales force and marketing product launch road maps to provide all workforce payouts for clients of any size. Give it a try and you will realize that the same worker acquisition or retention benefit seen by the large scale platforms in the world.

There's a robust pipeline of new partnerships ahead of us, the late-stage discussions, RFPs and LOIs to implementing final agreements. The aggregate GDV of our pipeline is in the several billion dollar range. This is a combination of Paid App partners and white label solutions. Our pipeline has never been better, and we look forward to providing updates to the market soon.

With that, I'll turn it over to Charles to review our Q2 financials.

[Charles Park, executive]

Thanks, Marco. Turning to Slide 7, you will see our summary income statement. In the second quarter, we generated revenue of $33.6 million, up 35% from the prior quarter and up 285% from Q2 2021. This increase was primarily driven by ongoing marketing initiatives, organic growth in each of our programs with DoorDash, Lyft and Uber.

Gross profit in the second quarter was a record $6.4 million at a 19.1% margin. Gross profit dollars were up 463% year-over-year and up 50% from the prior quarter. Our main -- our gross margin primarily benefited from volume-based pricing improvements with our higher active user base and GDV volumes.

As Marco mentioned, we are now adjusted-EBITDA profitable. This is because we scaled up our users in GDV, we continue to realize benefits in our vendor pricing and scale, which will continue to drive margin expansion over the balance of the year. We expect to be adjusted EBITDA positive on a full year basis for 2022.

While we have not issued guidance for 2023, I would like to reiterate the key drivers of our financial performance for the year ahead. First will be a full year of contribution of users we add over the balance of 2022, plus organic growth with our existing partners. DoorDash continues to expand outside of restaurant delivery and we look forward to ride share recovering and growing past pre-pandemic levels.

Potential new partnerships, both white label and through Paid App, could also contribute to additional revenue growth in 2023. From an adjusted EBITDA perspective, we believe we have the potential to realize margins of 15% to 20% plus in the existing [indiscernible]. On this basis, we expect operating cash flow to contract very closely to adjusted EBITDA, and we expect to be operating cash flow positive as well in 2022.

On a quarterly basis, our noncash working capital consumption will fluctuate as it did this quarter. This fluctuation is caused by timing differences as our clients fund trust accounts to reconcile cardholder earning payouts. Our clients move to adjusted time funding model in Q2 2022 compared to a 3- to 4-day prefunding model than we had in place prior to Q2. We actually need no working capital investment requirements to operate and grow our business. These timing differences should net out over the balance of the year.

On Slide 8, we summarize our current financial condition. We ended the quarter with $38 million in cash. The year-to-date reduction in our cash balance is a function of noncash working capital timing adjustments applied this quarter, which, as I mentioned previously, we expect to normalize on a full year basis. Our financial condition is strong. We had no incremental capital needs to fund our organic growth opportunities as our core business is self-financing. Our balance sheet is well capitalized, and we remain debt-free.

I will now turn it over to Cihan for a capital markets update.

[Cihan Tuncay, executive]

Thank you, Charles. Let's flip to Slide 9. This is the familiar strength that compares our share price performance to the ETFMG Prime Mobile Payment ETF since our IPO. We are happy to see that we have outperformed our benchmark by 16% over this period despite elevated market volatility in this year.

Flipping to Slide 10 shows where our stock is trading relative to other high-growth payments companies. I want to point out that all figures on this table are in U.S. dollars, and all forward-looking information reflects analyst consensus estimates and the midpoint of our revised revenue guidance for 2022. While we can't control market multiples, we have levers to pull to close the valuation gap with our peers.

The first lever is delivering on adjusted EBITDA and operating cash flow profitability, which we expect to achieve on a full year basis this year on both metrics. The second lever is expanding our gig platform partnerships. As Marco mentioned, we are excited about our current sales pipeline. The third lever is new products. We are fast approaching the 1 million user threshold, which gives us the opportunity to develop new products for incremental user monetization, including credit. We look forward to delivering updates on these initiatives over the coming months.

And operator, with that, we are now ready to take questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Joseph Vafi with Canaccord Genuity.

[Joseph Vafi, analyst]

Terrific progress and results. Congratulations on that. I thought maybe we would start -- it's nice to see the gross margin progression. And I think, Charles, you mentioned, part of that being a function of higher volumes.

I was wondering kind of where we potentially are on this gross margin journey at this point? How -- I mean, are there more -- is there more operating -- is there more leverage in the gross margin from here? Or kind of we hit a step function up and this is where we're going to be for a bit? And then I'll have a follow-up.

[Charles Park, executive]

Joe, thank you for your comments and your question. Just regarding gross margin, kind of consistent with what we talked about in Q1. We believe our run rate gross margin is probably in that 25% range based on our current business as it is right now. So we ended with 19.1% for Q2. So we definitely see some upside there.

When we start introducing some margin enriching programs or initiatives or products, obviously that will help further improve that beyond kind of that 25% run rate. But we do expect to hit that 25% rate by the end of the year. So there's still upward kind of movement -- or sorry, upward possibilities or benefits on the margin side, including the EBITDA as well as we've already discussed.

[Joseph Vafi, analyst]

Got it, that's helpful. And then it's kind of early days on Paid App, but is there anything you can share so far since its launch? And then I may just sneak one more in after that. .

[Charles Park, executive]

Sure. Maybe for the Paid App, I don't know, Marco, if you wanted to maybe take that, I can add some comments afterwards.

[Marco Margiotta, executive]

Yes, Joe. Yes, it's launched. We have a number of clients in the beta mode kind of testing phase to kind of test out certain aspects of the Paid App as well as the portal and ensuring everything is working the way it should. And it is live on the App Store, so those are up and running without any pause as we see it now.

But there's still some test mode that has to happen with from selected clients. There's a handful of them in there right now. And we do have, as we mentioned, a significant pipeline of activity for a number of gig platform partners that want to utilize that in its entirety, whether it's the whole gig portal solution -- or sorry, the Paid App portal solution to pay the workers through a number of different mechanisms, as well as talk about in addition to what we always offer, which is through our own cards.

[Joseph Vafi, analyst]

That's great. And then just wondering why some of your partners might have changed the timing of how they fund things. Is that something that we should start to watch? Or is there anything specific going on there?

[Charles Park, executive]

Yes, Joe, I can answer that. It's actually just a small change that was done. So previously, our clients would fund 3 to 4 days' worth of earnings payouts in advance. They worked out an arrangement with the underlying banks to effectively offer just-in-time funding. So rather than having 3 or 4 days kind of flow in the restricted cash counts, it may just be 1 day's worth of earnings payout.

So it's really just like a 1-quarter adjustment that we feel it's not going to necessarily impact noncash working capital on a go-forward basis. Works a little bit better for our partners. And from a bank's perspective, they got the necessary security to allow for that to happen as well.

[Operator]

Your next question comes from the line of Josh Siegler with Cantor Fitzgerald.

[Keeler Patton, analyst]

This is Keeler on for Josh. Congrats on the quarter. So you're turning to the Paid App for a minute. Could you guys add a little color around the go-to-market strategy for the Paid App? How are you going to go about pursuing that pipeline of opportunities?

[Charles Park, executive]

I can take that. It's certainly different than what we've done in the past. I mean we have the luxury of creating the space and pioneering the space. And so we show the larger gig platforms what they needed well before they thought they even needed it. So very fortunate to have that opportunity. We certainly hit the mark.

And now we created an environment where pretty much every gig platform is open and searching for a similar solution. You've now seen through DoorDash in the results they had earlier this week or last week, I think it was them announcing how impactful this was on the user cost of acquisition significantly driving it down.

And so we've seen that from early days. That's kind of the #1 moat that we try to assist the gig platforms achieve, bringing down the cost of acquisition on the driver side or workforce side more generically. And so the approach will be a bit different. We've hired a VP of Marketing, as we announced previously. That kind of starts to build up and drum up a funnel of activity around getting our brand out there front and center in front of all these gig platform clients.

We've also hired more recently some on the sales team to kind of help out with those initiatives. We've stretched the dollar to say that we're going to reach $130 million plus in revenue this year with just 1 salesperson previously, what was an overachievement to say the least. But -- now we're taking a bit of a different approach. We're kind of hunting with a shotgun and not a rifle. And so there's going to be a ton of opportunity channeling into our marketing efforts.

And so we're not chasing down any B2C activity, which would be hugely expensive. If you recall, the business model really skyrocket because of the B2B2C model. And so -- it will still stick to that notion, but we'll be targeting a much broader audience in terms of gig platform partners.

[Keeler Patton, analyst]

That's great. And then I guess more on the macro side, are you seeing any early indicators with clients that are material for the business from more of a macro perspective?

[Charles Park, executive]

No. I mean, at the outset, like we indicated in previous quarters or last quarter, more particularly, the initial onset of any headwinds kind of actually were favorable for us. So any inflationary pressure on prices means more GDV is used over the rails in terms of the POS transactions, everything costs more and drives a swipe, what we're seeing definitely inflation kind of hit that mark.

And then we also have a flock of people looking to make site income because they packed into their savings and now they need additional income coming from somewhere and a lot of them actually flow to the gig economy. And so as we see it right now, if anything, we see a bit of positive movement. Not so much negative headwind as some of the companies are kind of announcing to the results of the past quarter.

[Keeler Patton, analyst]

Okay. That's really helpful. Congrats on the quarter.

[Operator]

Your next question comes from the line of Adhir Kadve with Eight Capital.

[Adhir Kadve, analyst]

Congrats on the quarter from me as well. Just on the pipeline of partners for the Paid App, can you give us a sense the types of platforms that you've signed up or that are in the pipe? I know, Marco, you just said to the last question, you are looking at a broader audience of gig platforms. But are they mostly like similar ride-share platforms and food delivery platforms? Or maybe give us a sense about the broader audience that you were talking about. .

[Marco Margiotta, executive]

Yes, for sure. Thanks, Adhir. Yes, I would say most of the activity we're seeing, frankly, for us, it's almost a natural diversification away from just delivery, whether it's people or food. We're definitely seeing the bulk of the activity comes from non, dare I say, traditional gig platform services like rideshare and food delivery. So it's a mix. They're certainly very proactive in looking outside of the box within their respective area of the gig economy to kind of be front and center and showcase that they want to be innovative and want solutions like we offer for the largest gig platforms for their workforce.

And so I can't give too much color around that because it would really signal who some of these clients are. And for the right reasons, we're actually pausing the announcement of some of these initiatives just because they want that head start. And so without saying more than that, I can't tell you. It's definitely not -- most of them are not traditional A to B kind of delivery platforms.

[Adhir Kadve, analyst]

Okay. No, I completely appreciate that. And then just on the success of the DoorDash program and some of the positive commentary as it relates to the advantages of the DoorDash program coming from DoorDash themselves. Do you think you can potentially expand that relationship moving forward, maybe outside of just the digital bank accounts and the Instant Pay solution to maybe a broader set of financial products?

[Marco Margiotta, executive]

I won't speak to DoorDash specifically because we never like speaking about any clients in particular. But I will say it's a broader overall theme. The plan for Payfare itself was always to build a user base, start with the largest gig platforms get them on board. It should make it a lot easier to onboard other players in the space. And so with the introduction of the Paid App, that part of the strategic plan get the TAM really wide, get it across the gig economy platform, get every big and small gig platform on board. Once we have those users, we know now with just our onboarding and standard neobank offering, it's profitable. It generates cash.

Now the next layer has always been to monetize that user base a bit further. Until we can get very creative around that, we talked about referral fee arrangements where different merchants can benefit from having this large cardholder base flock into their retail locations, as one example. Huge margin opportunity on that one is a 100% margin given the referral nature of it.

The other opportunity, obviously, in terms of financial service is more specific to what you had asked. Obviously, credit is a big one. So we would look to launch products such as micro-credit overdraft, all the credit offerings that are kind of one would expect to have in the ecosystem that we have in the workforce and cardholder base that we have.

And so it's a very opportunistic place for us to be because given the visibility we have on the workforce, their earnings history, aspects of controlling the repayment through clawing back those earnings as it actually happened is in a very, very favorable position in terms of offering credit products.

[Adhir Kadve, analyst]

Got you. And then maybe I'll just sneak one last one in here, just on the rideshare segment. We've heard kind of travel and tourism is really accelerating post COVID. Can you give us a sense of how rideshare is performing? And what your expectations are for that segment? .

[Marco Margiotta, executive]

It's kind of tough to say, but I will say we're definitely seeing a ramp up. What we will want to see from our side and some of our partners is more marketing efforts to kind of get front and center, to pick up more of that activity, because we definitely want to stay in lockstep with that growth that we think we should see.

I mean, the old stat we used to refer to and were told by some of our big platform partners in the rideshare space was 50% of the activity that happens on the rideshare side is actually spending from travel. So we know that travel is getting better these days, considering all the noise that you hear about airlines and what's going on there.

So we definitely see some uptick momentum. How long it will last? Who knows. But it seems pretty favorable, given some of the earnings releases that we've heard from some of the rideshare partners that we have.

[Adhir Kadve, analyst]

Got it. congrats again, guys.

[Operator]

[Operator Instructions] Your next question comes from the line of Mike Rizvanovic, my apologies, with KBW.

[Mehmed Rizvanovic, analyst]

So a quick question just on the relationship with Lyft and DoorDash, it looks like it's going really, really well, probably getting better over time. And what I was wondering is if you could maybe first remind us of the expiration of the current contracts that you have with those 2 clients.

And then secondly, do you actively pursue -- sorry, extending those contracts early? Like an early extension. Is that something that's on your radar? Or do you just wait until toward the end of that contract to start discussing that with the client?

[Marco Margiotta, executive]

Thanks, Mike. Charles, do you want to talk about the expiration, if you can?

[Charles Park, executive]

Sure. Maybe without getting into specifics because of the contracts, I can speak maybe more generally, Mike, about the way the contracts are generally structured. Usually, what happens is that 3 months or after a national launch of a program, our agreements are usually structured with a 3-year kind of term with renewal terms that they're built in as well.

So in the case of DoorDash, the national launch was Q1 of last year. So you can just kind of track out kind of 3 years from that point in time. And then with Lyft, it was 3 years, the year prior to that as well. So that's one that would probably be coming up for renewal early next year as well.

In terms of early renewal opportunities, we're in constant conversations with our partners. So that's something that's always kind of on the table. But we feel very confident, just based off of our track history in terms of renewals that we are an integral part of their programs, and they see value in the relationship. And from a renewal perspective, there's no kind of worries. From a management perspective that those wouldn't be extended beyond the initial terms.

[Mehmed Rizvanovic, analyst]

For sure. I fully -- I could agree with you more. Just in a sense of like what drives that 3-year term, like how did it come to be that structure? Is that driven by the client? Or is that driven by Payfare? .

[Charles Park, executive]

I would probably say that the best thing to say is it's probably more of a collaborative thing. It was a structure that we had set up on our initial kind of contract with Uber Canada. And it's a structure that kind of work for both sides. So I think 3 years is a good opportunity for a program to start and blossom, and for both sides to kind of see the benefits of the program.

So it's a perfect kind of time period to make that assessment. So that's kind of how we got to that number. Not to say it wouldn't change on a go-forward basis, but for existing kind of big 3 logos, that's how we arrived at that time frame.

[Operator]

Your next question comes from the line of Stephen Boland with Raymond James.

[Stephen Boland, analyst]

Maybe the first thing on the Paid App, you mentioned you have a number of customers that are going through implementation. I mean how is that going versus your expectations? Is it anything that is positive, anything negative? Because you're obviously dealing with a number of different banks and stakeholders in this. Maybe just give an idea of how the actual process is going in your expectation?

[Marco Margiotta, executive]

I can speak to that. And then Charles, if you want to add in, feel free. I would say, for the most part, Steve, it's very much so excitement around the program, because a lot of the gig platforms were looking for a solution that they didn't know existed. So when they had you down, it's kind of the sentiment you get is that you're eager to get it going. And we're really happy they have a solution that didn't exist in their view from what they saw in the marketplace.

So a lot of that enthusiasm is carried through. We have massive time lines, we said we would. In fact, we're probably slightly ahead of schedule. So I don't want to jinx it. Just given where we're at, we're in a phenomenal spot in terms of what we see in that sales pipeline, many of that gig platform activity that we're seeing inbound -- or sorry, is inbound, which is super telling -- sorry what the market is saying. These solutions are definitely needed. And now we have the activity we see with not only our current clients, but the ones that we see forthcoming, we're on to something very significant.

And so thankfully for us, we have a lot of traction that we could point to in data points that are now in a significant manner. I'll just say with DoorDash and what activity they've seen and what they've been announcing in their results as well is a testament to what we've put together here.

And so all in all, Steve, I would say it's very, very positive. We're on track and we certainly see a number of more inbound interest without even starting the outbound comms and brand new strategy around how we will build a bigger funnel.

[Stephen Boland, analyst]

Okay. And would you expect some of these to be actually made public? I mean I know that's a discussion between you and the platform, but is that something that you think they would start to advertise on their side to attract whatever the platform is, but whether it's drivers or users or employees or something like that? .

[Marco Margiotta, executive]

Yes. And I can certainly add some more color to that. As I mentioned before, it's not in the traditional A to B gig space of bringing food or people. For the most part, a lot of these new clients that we have coming on board are from areas of the gig economy that are -- maybe even well known. A lot of them are substantially -- they're big in size, they wouldn't be well known in terms of what they do in terms of how they offer their services, and some of them are very innovative in how they do it. .

And what I'll say to that is, for a lot of those reasons, they're the leader in their respective subsegment of the gig economy. They'll want to keep this head start under the radar until it's launched. And so we're abiding by that. It's no different than what we did with one of our clients, in particular a couple of years ago when they thought what we were doing together was incredibly innovative. And as we did, we wanted to keep it under wraps until we were kind of closer to launch. And so that's what's really playing into it.

There's also some very big names that everyone would recognize that we're speaking to in various stages of those contracts. Some of them might come through the Paid App. Others might want their own white label, which given the volumes they possess, we would certainly entertain. And so it's kind of a mixed bag of that we belong. And a lot of those bigger means are more in the traditional side of A to B activity.

[Stephen Boland, analyst]

Okay, I appreciate that. And maybe just I was thinking back on the Marqeta partnership. It's about a year old now. It's been fairly quiet in terms of news flow. I'm just wondering what's the status? Is that partnership translated into revenue opportunities? Maybe you just provide an update.

[Marco Margiotta, executive]

Yes, happy to. And Charles, if you want to chime in as well, go for it. But I would say we spent quite a bit of time with the implementation and getting that up and running. That's recently been retrieved, and so we're now very close to being completely fully integrated. If not, we are already, it's probably within a couple of weeks. And Charles, I don't know if you have an update there in terms of the full implementation there. .

[Charles Park, executive]

Yes. Steve, the only thing I would add to is, from a deal flow perspective as well, the partnership has locked them in that way, too, and that Marqeta has passed on very favorable leads to us as well that we hope to announce in the future. But -- so both from a business development perspective and from a technical aspect, I would say it's been a great partnership to date. .

[Marco Margiotta, executive]

When we say at this point the bulk of the year has been spent on the implementation side. And now that that's kind of wrapped up, we expect not only the referrals we have, but some of them to come to fruition. .

[Stephen Boland, analyst]

Okay. And -- but you're still running 2 separate parts, right, there like you're not -- you haven't combine that part yet or if you ever?

[Marco Margiotta, executive]

That's right.

[Operator]

There are no further questions at this time. I will turn the call back to Marco for closing remarks.

[Marco Margiotta, executive]

Yes, we'll be very short and sweet. Thank you so much, everyone. Looking forward to speaking to everyone back in -- or next in Q3. Take care. Bye.

[Operator]

This concludes today's conference call. You may now disconnect your lines.